If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. You must consider these rules in the order shown below. Both are discussed in this section.

At-risk rules. These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. This applies only if the real property was placed in service after
1986.

Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. However, there are
exceptions.

A loss from an activity carried on as a trade or business or for the production of income,
and

Amounts invested in the activity for which you are not fully at
risk.

Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.

In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. See Publication
925 for a discussion of the at-risk rules.

In most cases, all rental real estate activities (except those meeting the exception for
real estate professionals, later) are passive activities. For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. For a discussion of activities that are not considered rental activities, see
Rental Activities in Publication
925.

Deductions or losses from passive activities are limited. You generally cannot offset income, other than passive income, with losses from passive activities. Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Any excess loss or credit is carried forward to the next tax year. Two exceptions to the rules for figuring passive activity limits are discussed on this page.

If you are a real estate professional, complete line 43 of Schedule
E.

You qualify as a real estate professional for the tax year if you meet both of the following requirements.

More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially
participate.

You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

For purposes of meeting these qualifications, each interest in rental real estate is a separate activity, unless you elect to treat all your interests in rental real estate as one
activity.

Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest.

Do not count your spouse's personal services to determine whether you met the requirements listed above. However, you can count your spouse's participation in an activity in determining if you materially participated.

If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. You can make this choice for any year that you qualify as a real estate professional. If you forgo making the choice for one year, you can still make it for a later year.

If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. This is true even if you are not a real estate professional in any intervening year. (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules.)

See the instructions for Schedule E for information about making this
choice.

Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. For details, see Publication
925 or the Instructions for Schedule C.

If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Do this even if your spouse owns no interest in the activity or files a separate return for the year.

You may have to complete Form 8582 to figure the amount of any passive activity
loss for the current tax year for all activities and the amount of the passive
activity loss allowed on your tax return. See
Form 8582 not required, later in this chapter, to determine if you must complete Form
8582.

If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as
required.

If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Instead, follow the rules explained in
chapter 5,
Personal Use of Dwelling Unit (Including Vacation Home).

If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this
exception.

Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. $2,000 of Jane's $3,500 loss offsets her passive income. The remaining $1,500 loss can be deducted from her $40,000
wages.

The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return.

You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and
bona fide
sense. Management decisions that may count as active participation include
approving new tenants, deciding on rental terms, approving expenditures, and
other similar decisions.

Mike is single and had the following income and losses during the tax
year:

Salary

$42,300

Dividends

300

Interest

1,400

Rental loss

(4,000)

The rental loss was from the rental of a house Mike owned. Mike had advertised and rented the house to the current tenant himself. He also collected the rents, which usually came by mail. All repairs were either made or contracted out by
Mike.

Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other
income.

$25,000 for single individuals and married individuals filing a joint return for the tax
year,

$12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year,
and

$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse
qualified.

If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your
MAGI.

Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special
allowance.

Do not complete Form 8582 if you meet all of the following conditions.

Your only passive activities were rental real estate activities in which you actively
participated.

Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing
separately).

If married filing separately, you lived apart from your spouse all
year.

You have no prior year unallowed losses from these activities.

You have no current or prior year unallowed credits from passive
activities.

Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all
year).

You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a
trust.

If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. On lines 23a through 23g of your Schedule E, enter the applicable
amounts.